Stepstone Group Inc. · NASDAQ:STEP
Stepstone — Conference Presentation (November 2023)
29 slides from Stepstone's conference presentation, November 2023
Slide 1: StepStone Real Estate House Views
StepStone Real Estate (“SRE”) House Views FALL 2023 | CONFIDENTIAL
Slide 2: Disclosure
Disclosure This document is for informational purposes and is meant only to provide a broad overview for discussion purposes. This document does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security, or as an offer to provide advisory or other services by StepS
Slide 3: With You Today
With You Today MARGARET MCKNIGHT ANDREW MITRO ANJA RITCHIE MICHAEL HUMPHREY PARTNER AND HEAD OF PARTNER, MANAGING DIRECTOR, DIRECTOR, ASIA PORTFOLIO SOLUTIONS, CLEVELAND EUROPE SAN FRANCISCO CLEVELAND FRANKFURT SAN FRANCISCO SINGAPORE CONFIDENTIAL | 3
Slide 4: Table of Contents
Table of Contents I. Market Themes II. Preferred Strategies & Portfolio Construction III. Regional Outlooks
Slide 5: Comprehensive Sourcing of House Views
Comprehensive Sourcing of House Views MARKET RESEARCH ACTIVE INVESTMENTS Third-party macro Bottom up transaction and real estate market intel from active research • underwriting • portfolio management StepStone Real Estate House Views Insights from SRE activities, in 2022: • Daily work with leading
Slide 6: Market Themes
MARKET THEMES
Slide 7: Higher Interest Rates Lead to New Opportunity
Higher Interest Rates Lead to New Opportunity 2022 2023+ Public market correction, Pressures build around debt, private real estate private real estate repricing, NOW Very Favorable Outlook pause debt restructuring • Debt underway • Secondaries and Recapitalizations • Opportunistic / Distress, NPLs
Slide 8: Real Estate Markets are Correcting, Slowly as is Typical
Real Estate Markets are Correcting, Slowly as is Typical The US office situation is far worse than other property types or office elsewhere. Secular trends exacerbate US office problems while dampening harm to others from cyclic slowdown Market is Repricing Volume Still Depressed • Further decline i
Slide 9: Private Markets are Repricing
Private Markets are Repricing TOTAL RETURN PEAK-TO- PEAK 2022 1H 2023 CURRENT QUARTER PUBLIC INDICES1 Publics led price drop, now rising. More volatile, linked to broad equity indices Broad public equities: MSCI ACWI -18.0% 14.2% -6.3% Q4 2021 Barclays Capital US Aggregate Bond Index -13.0% 2.1% -11
Slide 10: Core Indices Lag Trading Prices, but are Repricing
Core Indices Lag Trading Prices, but are Repricing CAPITAL RETURN: PRIVATE PEAK TO CURRENT LTV % EXPOSURE TO OFFICE DATA ADJUSTED FOR MORE DIRECT US COMPARISON1 Public RE – NAREIT All Equity REITs2 -26.9% 34.6% 4.5% Green Street CPPI , Unlevered -23.9% NM3 25.0% Green Street CPPI, Levered4 -31.2% 24
Slide 11: While Trading is Depressed, There is Select Liquidity
While Trading is Depressed, There is Select Liquidity More stable interest rates and seller capitulation expected to lift sales GLOBAL QUARTERLY TRANSACTION VOLUME (US$ BILLIONS) $600 • Much more robust than GFC era $500 • 40% below expansion period globally $400 $300 • Concentrated in industrial an
Slide 12: Debt Costs Persistently High, Doubling Since Early 2022
Debt Costs Persistently High, Doubling Since Early 2022 • Leveraged owners with near term maturities and/or LOAN COST: FIXED2 6.49% floating rate debt face funding gaps 374 bps +2.10% 2.4x Increase Spread 2.75% +1.25% 4.39% 10- Spread Year Swap 1.50% 10-Yr Swap Jan-22 Oct-23 INTEREST RATE CAP COST L
Slide 13: Higher Rates Mean Much Lower New Loan Proceeds
Higher Rates Mean Much Lower New Loan Proceeds COMMERCIAL / MULTIFAMILY MORTGAGE MATURITIES (US$ Jan-22 Oct-23 BILLIONS) Maturing Loan New Loan Owner Options: $800 $3,000 Property Value $100M $82M Cumulative Maturities Annual Maturities $600 Equity Fund It $2,000 $400 OR $29M Funding Gap $1,000 Reca
Slide 14: US Bank Outcomes Vary; Slow Recovery for Lending
US Bank Outcomes Vary; Slow Recovery for Lending System is solid, supported by Fed This is Not the GFC for Banks US MORTGAGE DEBT OUTSTANDING AS SHARE OF GDP • CRE loans are a much smaller share of the US 90% 76% 80% economy than home loans 70% 60% 51% • Banks directed to reduce CRE exposure, pace l
Slide 15: Non-Core Fundraising Down, Still a Lot of Dry Powder
Non-Core Fundraising Down, Still a Lot of Dry Powder Pre-correction assets likely to use dry powder, reducing acquisitions for pre-23 vintages GLOBAL PRIVATE REAL ESTATE FUNDRAISING (US$ BILLIONS) GLOBAL PRIVATE REAL ESTATE FUND DRY POWDER (US$ BILLIONS) 250 2023 at ~50% of 800 450 prior year’s 395
Slide 16: Open Ended Fund Queues Still Sizeable
Open Ended Fund Queues Still Sizeable Queues reflect investors seeking liquidity from open-ended funds NCREIF ODCE FUND QUEUES Redemption queues continue to build $15 15% $10 10% $5 $0 Fund managers are making some selective exits Net Queue as % of Net Assets 5% but are generally gated and not makin
Slide 17: Secondary Sales Rising
Secondary Sales Rising LPs seek liquidity and GPs need to fund recapitalizations GLOBAL REAL ESTATE SECONDARIES VOLUME • GP-led growing to manage funding gaps and LP liquidity ($ in Billions; 2023P = projection) $15.0 • LP-led prices and volume low $12.5 • Investors mainly selling problems $10.6 • D
Slide 18: Ultimately Real Estate Reprices to Higher Yields
Ultimately Real Estate Reprices to Higher Yields Thus, continuing to serve a useful role in portfolios in a higher interest rate environment US CORE PROPERTY-LEVEL UNLEVERAGED RETURNS 1H 2023 VS. ONE- AND FIVE-YEAR PROJECTIONS 10% 6.2% 5.7% 6.0% 5.6% 5% 3.6% Five-year projection reflects 43% drop in
Slide 19: Preferred Strategies & Portfolio Construction
PREFERRED STRATEGIES & PORTFOLIO CONSTRUCTION
Slide 20: Global Real Estate Portfolio Positioning
Global Real Estate Portfolio Positioning RECOMMENDED TILTS VS. NEUTRAL WEIGHTING: REGIONAL US EUROPE ASIA PACIFIC GLOBAL Industrial 35% 27% 29% 31% 36% 34% 35% 35% Multifamily 28% 21% 3% 20% 30% 24% 8% 24% Office 18% 24% 45% 25% 11% 18% 35% 18% Retail 10% 14% 21% 14% 8% 8% 15% 9% Other 9% 14% 2% 10%
Slide 21: Preferred Market/Property Type Strategies
Preferred Market/Property Type Strategies Investor Favorable Neutral Investor Unfavorable PROPERTY TYPE MARKET CONDITIONS INVESTMENT APPEAL DEMAND SUPPLY SECULAR SUPPORT CYCLIC TECH DEMOGRAPHIC US EUROPE APAC Majors • Office n/a • Industrial • MF - Class A - Class B/C • Retail Other Rental Residenti
Slide 22: Private Debt: Better Terms, Less Competition, Higher Returns
Private Debt: Better Terms, Less Competition, Higher Returns • US volume down 52% YOY June 2023, estimated 32% THREE MONTH FORWARD CURVES, Q3 2023 VS. Q1 2022 fewer lenders 6% • Lower attachment points, better terms, higher yield 5% 4% • Transitional lending can offer value-add IRRs with 3% consider
Slide 23: Regional Outlooks
REGIONAL OUTLOOKS
Slide 24: US Core Portfolio Positioning
US Core Portfolio Positioning FIVE-YEAR CORE FUND NET RETURN PROJECTIONS BY TYPE RECOMMENDED PROPERTY TYPE TILTS VS. NFI-ODCE As of Mar 2023 7% 5.8% 5.6% 35% 6% 5.3% Industrial 5.1% 5.1% 36% 4.8% 5% 4.4% 4.4% 4% 3% 2.1% 28% Multifamily 2% 30% 1% 0% Housing Industrial Multifamily Malls (A Self Storag
Slide 25: European Core Portfolio Positioning
European Core Portfolio Positioning FIVE-YEAR CORE FUND NET RETURN PROJECTIONS BY TYPE RECOMMENDED PROPERTY TYPE TILTS VS. INREV CORE 5% 4.6% 27% 3.7% 3.8% Industrial 4% 34% 3.4% 3.1% 3.1% 3% 2% 21% Residential 24% 1% 0% 24% Residential Industrial Senior Housing Office Europe / UK Retail Office Core
Slide 26: Europe: Preferred Market/Property Type Strategies
Europe: Preferred Market/Property Type Strategies Investor Favorable Neutral Investor Unfavorable PROPERTY TYPE INVESTMENT APPEAL EUROPE UK GERMANY FRANCE NORDICS SPAIN NL Majors • Office • Industrial • MF - Class A - Class B/C • Retail Other Rental Residential • Manufactured Housing n/a n/a n/a n/a
Slide 27: Asia-Pacific: Preferred Market/Property Type Strategies
Asia-Pacific: Preferred Market/Property Type Strategies Investor Favorable Neutral Investor Unfavorable PROPERTY TYPE INVESTMENT APPEAL APAC JAPAN CHINA AUSTRALIA KOREA HONG KONG SINGAPORE Majors • Office • Industrial • MF - Class A - Class B/C • Retail Other Rental Residential • Manufactured Housin
Slide 28: Thank you!
Thank you! Please direct questions to SREMarketResearch@stepstonegroup.com or reach out to your client manager.
Slide 29: Risks and Other Considerations
Risks and Other Considerations Risks Associated with Investments. Identifying attractive investment opportunities and the right underlying fund managers is difficult and involves a high degree of uncertainty. There is no assurance that the investments will be profitable and there is a substantial ri
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